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Luther v. Navistar International Corp.

United States District Court, N.D. Illinois, Eastern Division

March 19, 2018

REGIS LUTHER, Plaintiff,
v.
NAVISTAR INTERNATIONAL CORPORATION, NAVISTAR, INC., and NAVISTAR SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN, Defendants.

          MEMORANDUM OPINION AND ORDER

          REBECCA R. PALLMEYER United States District Judge

         Regis Luther's claim for enhanced severance and retirement benefits from his former employer, Defendant Navistar, Inc., has generated multiple rounds of briefs and two significant rulings. Luther's position as a Navistar Vice President ended in 2014. He filed this lawsuit early the next year, alleging breach of his compensation agreements. Navistar removed the case to this court as preempted by the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq., and moved for summary judgment on the basis of a release Luther had signed. The court rejected that argument, see Luther v. Navistar Int'l Corp., No. 15 C 3120, 2016 WL 3568809 (N.D. Ill. July 1, 2016) (“Luther I”), but suggested Luther's claim for enhanced severance benefits would be difficult to establish. Navistar then moved for summary judgment on the merits of Luther's claims, but the court denied that motion as well, finding disputes of material fact under a theory that Luther had raised only in his response brief. Luther v. Navistar Int'l Corp., No. 15 C 3120, 2017 WL 1197103 (N.D. Ill. Mar. 31, 2017) (“Luther II”). The court granted Luther leave to file an amended complaint (his third amendment since initiating this lawsuit) to assert this new theory, and he has done so. Navistar has filed a motion for partial dismissal of this case and for partial reconsideration of the court's denial of Navistar's motion for summary judgment. As explained here, the court concludes that the evidence does not support Luther's claim that a “409A change in control” (described below) occurred prior to his termination. The motion for partial reconsideration [111] is therefore granted.

         BACKGROUND

         The court has discussed the facts of the case in detail in its two previous opinions and summarizes those facts briefly here. Luther was terminated on June 30, 2014. (Third Amended Complaint (labeled as Second Amended Complaint) (hereafter “Compl.”) [107], at ¶ 27.) At the time of his firing, Luther had two agreements with Navistar that provided benefits to him upon severance: the Executive Severance Agreement (“ESA”) and the Supplemental Executive Retirement Plan (“SERP”). (Id. ¶ 14.) It is somewhat unclear whether these are two agreements or whether, as Luther alleges, the “ESA is Mr. Luther's Supplemental Executive Retirement Plan.” (Id. ¶ 15; compare Answer to Plaintiff's Third Amended Complaint [110] ¶ 1.)[1]Either way, there were three potential outcomes for Luther upon his separation from the company: A termination not associated with any change in control of the company entitled Luther to 150% of his salary, plus his “annual incentive target, ” which appears to be an annual performance bonus. (Id. ¶ 5(a).) If Navistar terminated Luther within 36 months after a change in control of the corporation (referred to as a “standard CIC”), [2] then, pursuant to Paragraph 3 of the ESA, he received 200% of his salary, in addition to the annual incentive target. (Id. at ¶ 5(b).) And if the change in control met certain requirements set forth in regulations interpreting Internal Revenue Code § 409A, the package became sweeter still: Under paragraph 5(b)(iii) of the ESA, a 409A change-in-control termination would also accelerate Luther's eligibility for certain additional retirement benefits under Navistar's Supplemental Executive Retirement Plan (“SERP“). The nature of these enhanced benefits has been explained elsewhere, but the details and amounts at stake are not important for purposes of this decision. Navistar has not contested Luther's claim for standard retirement benefits, and does not, in this motion, challenge Luther's claim that his termination occurred within 36 months of a “standard CIC.” On this motion, Navistar argues only that the court erred in denying summary judgment on Luther's 409A theory. (See Navistar Br. in Supp. of Mot. (hereafter “Def.'s Br.”) [112-1], at 1.)

         Paragraph 5(b)(iii) of the ESA defines a “409A change in control” as “a change in ownership or effective control of the Company or a change in ownership of a substantial portion of the assets of the Company under Section 409A of the Code.” IRS regulations at 26 CFR 1.409A-3(i)(5)(v)-(vii) set out several conditions for a “change in control” of a company which differs from those of a “standard CIC.” As relevant to this case, if “a person or group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) 30% of the total voting power of the stock, ” 26 CFR 1.409A-3(i)(5)(vi)(A)(1), within 24 months of Luther's termination, then a 409A change in control has occurred and Luther is entitled to additional benefits from Navistar.[3] The question before the court is whether there are disputes of fact about whether a 409A change in control in fact occurred. More specifically, to prevail on this motion, Luther must present evidence that on some date within the 24 months prior to his June 30, 2014 termination, there was a date on which a shareholder, or a group of shareholders, had acquired 30% of Navistar's stock within the 12 months prior to that date. The operative complaint does not allege that such an acquisition occurred, Navistar asserts, meaning that its motion to dismiss this claim should be granted. Alternatively, as the evidence does not support the conclusion that such an acquisition took place, Navistar believes it is entitled to summary judgment on Luther's 409A claim.

         Luther contends there is evidence sufficient to support his claims that a 409A change in control did occur. He cites stock purchases made by Carl Icahn beginning in 2011 and Mark Rachesky (or his affiliate, MHR Group) in 2012. (Compl., ¶¶ 36, 40.) The Icahn and MHR investors disclosed ownership stakes on July 14, 2013 and July 19, 2013 which together exceeded 25% of total outstanding Navistar stock. (Id. at ¶¶ 73, 75-78.) Icahn and MHR continued to purchase stock and purchased an amount totaling nearly 35% by June 23, 2014. (Id. at ¶¶ 81-83.) He urges, further, that evidence supports the conclusion that Icahn and MHR were acting as a “group.”

         In its earlier opinion, Luther II, the court concluded that there are genuine disputes of fact about whether a standard CIC as well as a 409A change in control occurred. Luther II, 2017 WL 1197103, *6-9. As noted, Navistar does not challenge the court's determinations regarding a standard CIC. Navistar does, however, contend that the court erred in its 409A analysis. First, Navistar urges that the language of the 409A regulation requires that any investor group have acquired 30% of the stock within a single 12-month period, which Luther has not established. Second, Navistar contends that the court erred in defining “group” in the way that it did: the word “group” in the 409A regulations, Navistar contends, is different than the way that it is used in the Williams Act, Pub L. No. 90-439, 82 Stat. 454 (codified at 15 U.S.C. § 78m(d); 15 U.S.C. § 78n(d)), which the court addressed earlier. Luther concedes that for purposes of a 409A change in control, a group must have acquired its shares within a 12-month period. That test is in fact met in this case, he insists because (1) Icahn and MHR acquired 29.92% of the shares within a 12-month period, which, because of the time that those acquisitions were reported, may have exceeded 30%, and (2) that the court should round up the 29.92% figure to 30%. (Pl.'s Resp. Br. [127] at 8-10.)

         For reasons explained here, the court is not inclined to reconsider its ruling on the definition of a “group” for purposes of 409A. Navistar prevails on the 30%-over-12-months issue, however, so the court need not reach the definition question.

         DISCUSSION

          Purchase of 30% over 12 Months

         Because the 30%-over-12-months argument is dispositive, the court addresses that issue first. Luther has alleged that the Icahn-MHR group together acquired assets culminating in 34.84% of the total voting power of Navistar's stock on June 23, 2014, over the course of about two years. As Navistar emphasizes, however, a Section 409A change in control occurs on “[t]he date any one person, or more than one person acting as a group (as determined under paragraph (i)(5)(v)(B) of this section), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing 30 percent or more of the total voting power of the stock of such corporation.” 26 U.S.C. § 1.409A-3(i)(5)(vi)(A)(1) (emphasis added). That means, Navistar notes, that to trigger a 409A change in control, a group must acquire 30% of a company's shares within a 12-month period, not simply exceed the 30% ownership cap. As noted, Luther has not specifically challenged this assertion.

         The court concludes that Navistar's interpretation of the regulatory language is correct. As noted, several conditions are identified in the regulations as triggering a change in control; only the 30% test is relevant to this case. But of the other conditions listed, only one of them does not include a time limit over which acquisition must occur: in particular, the regulation recognizes that a change in control has occurred when an entity has achieved 50% stock ownership, without regard to the time period over which that achievement happens. 26 CFR 1.409A-3(i)(5)(v)(A). If the 30% ownership threshold at issue in this case also has no time limit, the 50% test becomes irrelevant. The court declines to adopt an interpretation that renders one regulatory provision superfluous.

         In addition, an example from a different IRS regulation-not at issue here-that also deals with changes in control resulting from stock acquisition over time supports Navistar's position that the acquisition must occur over a 12-month period of time. That other regulation, 26 C.F.R. § 1.280G-1, uses identical language to limit the period over which a person or group can acquire stock:

Any one person, or more than one person acting as a group (as determined under paragraph (e) of this A-28), acquires (or has acquired during the 12- month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing 20 ...

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